One point of pushback we got on the road recently about our Long NKE call is that the company will be unable to cycle its price increases in footwear. We think the argument is moot for several reasons.
- You could have made this argument in 2011. Then again in 2012. You’d have been wrong. In making in 2013 we think you’ll be wrong again.
- In 2H11 it appeared as if the sky was falling as you can see in the chart below, and ASPs were on their way back down from consistent mid-single digit gains. That ended up being very wrong as the company launched products like FlyKnit and Nike+ They manage the business for either units or asp – rarely if ever do they happen simultaneously.
- ASP does not only mean price. While Nike has certain evergreen product like Dunks and certain Bowerman running product in this business it is near impossible to put through price increases on like for like product. That’s in part because like for like product does not exist. 90% of the product line changes every 90 days. But overwhelmingly, we’re talking mix, not price. And most importantly, higher mix does not mean higher profitability. In fact, while ASP went up over the past two years, Gross Margin in aggregate went down. This was in large part due to apparel, but the so-called ‘strength’ in footwear profitability should have otherwise offset apparel weakness. It did not.
- The punchline is that there needs to be an element of trust here. We hate saying that, as trust is hardly an investment process. But the company manages its business around a top line number. There are times when it fuels this top line goal by higher average prices due to a new product launch at a high price (but at lower volumes), and then there are other times where the product works its way into ‘proliferation mode’ to a lower-price-point consumer and greatly accelerates unit growth in more mainstream channels of distribution (ie Kohl’s instead of Nike Retail). There are not many companies where we’ll front them any form of success in their business plan, but the fact is that Nike has an overwhelmingly successful track record in delivering on its expectations for managing the product price/volume curve (notably in footwear). We won't blindly trust that they hit their goal, but we'll give them the benefit of the doubt.
We understand why people want proof of the company’s ability to deliver on the top line before they get bullish. But in this instance, and at this price, we think that waiting for proof will simply be too late.